By Elizabeth Low, Weng Yile, Edwin Yeo and Pankti Mehta
June 6, 2018 - Uncertainty lingers in the met coal market as China considers plans to increase US coal imports in order to reduce the significant trade deficits between the two economies.
While this could be a major development for the coking coal market, market participants said that several issues have to be tackled first for this to effectively take place.
Currently, US coals to China are taxed at a rate of 3%-6%, and the US makes up a small percentage of Chinese coking coal imports.
This is because much of the bilateral trade relations in terms of coal hinge primarily on spot prices, and unless specific measures are made to commit volumes or tonnages irrespective of prices, sources were uncertain as to how this could be implemented.
A mining source said that China is currently buying US coking coals because they are competitively priced when compared to Chinese domestic coals or other supply origin such as Australia.
Conversely, US miners "do not necessarily need or want to sell to China [specifically]. They sell to whoever who gives the highest price," the source added. If China is not giving the best price, US miners would not be compelled to sell to China, the source said.
One option indicated by some steelmaker participants was the lifting of the import tariff for US coals.
Australia, the world's largest seaborne exporter of coking coal, and Indonesia, a significant thermal coal exporter, have their coal import tariffs waived because of their respective free trade agreements with China.
If the import tariffs are lifted for US coals, they will be much more cost competitive compared to other suppliers who are still subject to coal import tariffs such as Canada, Russia and Mongolia.
However, some sources were skeptical about this as a free trade agreement typically takes years to implement, and usually involves a wide range of goods and services, rather than one particular product.
Another option would be for China to enforce certain measures where end-users have to make some compulsory purchases of US coals. But this would require the industry associations' support, which will encourage mills to procure more US material.
All participants, however, agreed that while the means in which how this goal can be achieved is still uncertain, if China has a will, it will have a way to do so.
"If China really wants to do this, it will have a plan," an Australian mining source said, though he indicated that "it is not a short term plan that can be realized." "If you want to increase imports of coal, [you] need some time ... need different approaches to consider."
Several sources said that if the government is successful in increasing US coal imports, it will likely affect coking coal more than thermal coal.
One reason is that US-China freight costs constitute a higher proportion of the costs for thermal when compared to metallurgical coal, sources added.
In addition, US thermal coals have high sulfur in content which is not really what the Chinese market desires, one mining source said.
US Coking Coal Spot Trade Volumes Up 69.6% in May
Amid such concerns in the industry, S&P Global Platts has observed an increase in spot trade volume for US coking coals to China.
In 2017, US coking coal volume to China totaled 2.6 million mt, up 310% from 0.65 million in 2016, data from US energy information administration showed.
According to Platts' spot trade data, US coking coal trade volume to China increased 69.6% on the month in May to 0.86 million.
Coking coal market sources have attributed the rise to low pricing, as well as recent tightness in alternative coking coal supply sources such as Mongolia.
This comes at a time when the overall global supply of coking coal is witnessing uncertainty with ongoing dispute between Australian miners and the Aurizon railway, with premium coal prices strengthening since the end of May.
Platts assessed premium low vol FOB Australia prices up $4/mt on the week to $197/mt FOB Australia Tuesday and CFR China prices up $2/mt to $200/mt.
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